Lessons from South Korea for Stock Market Investors, Especially Young Investors
By Sanjeev Chandorkar
Discussions about Artificial Intelligence (AI) are no longer new. It is natural to wonder how AI will impact the field you work in—whether it’s the IT industry, the broader economy, or concerns about rising unemployment.
Another major debate revolves around whether the share prices of AI companies in the United States have entered an asset bubble. If such a bubble exists, could it burst suddenly, triggering a crisis similar to the Dot-com crash of 2000 or the Global Financial Crisis of 2008?
The U.S. stock market has always had a significant influence on markets around the world, including India. If such a crash were to occur, what would be its impact on the Indian stock market?
Over the past few years, millions of middle-class Indians have started investing their savings in the stock market. Their participation is far greater than during previous market crises. As a result, any major correction today could affect millions of households. Investors should therefore remain informed and understand the risks involved.
While AI-related stocks in the U.S. have been experiencing volatility, the first major shock came from South Korea, where AI-related companies and the overall stock market witnessed a dramatic fall.
Last week, South Korea’s benchmark index, the KOSPI (similar to India’s Sensex), dropped by more than 40% from its all-time high within just three trading sessions. (It has recovered somewhat over the past two days.) Considering that the KOSPI had risen nearly 180% over the previous year, one can imagine the level of market enthusiasm that had prevailed.
However, a rising index does not necessarily mean that all or even most companies have performed equally well.
Two companies alone—Samsung and SK Hynix—account for nearly 50% of the KOSPI index. A similar situation exists in the United States, where a handful of AI companies have driven the broader market to record highs. During the sharp correction, Samsung’s shares fell by around 25%, while SK Hynix dropped nearly 30% in just three days. Circuit breakers had to be triggered three times during that period, and trillions of won in market value disappeared almost overnight.
Several reasons have been cited for this dramatic fall, but one major factor was the introduction of an Exchange Traded Fund (ETF) based almost entirely on the shares of these two companies. Since May, many investors had started borrowing money to invest in this ETF.
This defeated the very purpose of ETFs.
ETFs are generally designed to hold a diversified basket of securities, helping investors reduce risk through diversification. Concentrating an ETF primarily in just two stocks undermines that principle.
Nevertheless, this new investment product had received approval from South Korea’s market regulator.
Many retail investors took advantage of it by borrowing funds from brokerage firms to speculate on the prices of these two companies’ shares. Around 90% of the investors in this ETF were retail investors.
There is a fundamental difference between investing your own savings and investing with borrowed money. When you invest using borrowed funds, the purchased shares are pledged as collateral with the brokerage firm.
The agreement typically states that if the value of those shares declines and the loan becomes risky, the broker can either ask the investor to deposit additional money—a margin call—or, if the investor fails to do so, sell the pledged shares to recover the outstanding loan.
This is exactly what happened in South Korea. Forced selling due to margin calls became one of the major reasons behind the rapid collapse of the stock market.
A large proportion of investors in this ETF were young people. Many of them struggle with low incomes, cannot afford to buy homes, lack financial stability, and therefore postpone major life decisions such as marriage. In search of quick wealth, many young investors turned to the stock market and speculative ETF investments.
As financial markets become increasingly speculative, the financial system will continue introducing newer and more complex products to attract more investors. It is therefore essential for investors to clearly understand the difference between long-term investing and speculation.
A Message for Indian Investors—Especially the Youth
Your financial challenges are real. However, do not chase quick riches.
Invest only according to your risk tolerance, and never treat the stock market as a guaranteed shortcut to wealth. Most importantly, never borrow money to invest in speculative assets.
Warning signs are already visible in the U.S. and global stock markets. Read about them, understand the risks, and make informed investment decisions rather than emotional ones.
